Interest rate increase will have a harsh impact on the non-resource states

02 November 2010

The Reserve Banks decision to lift interest rates to 4.75 per cent is clearly motivated by the strength of the resource states economies and overlooks vulnerabilities in other states, according to the Urban Taskforce. The Taskforces chief executive, Aaron Gadiel, said it was hard to reconcile some of the statements made by Governor Glenn Stevens today.

In his statement Mr Stevens said:


¢ Asset values are not moving notably in either direction, and overall credit growth remains quite subdued at this stage notwithstanding evidence of some greater willingness to lend.


¢ …the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity.


¢ The Board is also cognisant of differences in the degree of economic strength by industry and by region.


The non-resource states, such as NSW and Victoria, are experiencing stable asset prices, and subdued credit growth, Mr Gadiel said.


Yet its the resource exporting states, such as Western Australia, that are the greatest winners from the high terms of trade.


This interest rate rise couldnt be justified if you were looking at the economies of NSW or Victoria in isolation.


If anything, the higher exchange rate is reducing demand for non-resource exports from these states and diminishing the interest of overseas property investors.


These states are particularly dependant on new home construction and this interest rise will dampen economic activity in this sector.


The lack of new home production will, in time, push home prices up, which will probably trigger further interest rate rises from the bank.


It looks like the Reserve Bank will trap us in another vicious cycle.


The Urban Taskforce is a property development industry group, representing Australias most prominent property developers and equity financiers.


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